One Big Thing
Its no secret that office landlords – especially those in expensive coastal markets – are struggling. Vornado Realty Trust (VNO) is one of the worst positioned for the post-pandemic world with the vast majority of its holdings in NYC. Vornado’s recent earnings sucked – and missed already-low expectations. During the earnings call, an analyst asked a question of CEO Steven Roth about why offices aren’t the next malls. His flippant answer was telling. From Seeking Alpha (emphasis mine):
Michael Bilerman
It’s Michael Billerman here with Manny. I was wondering if you can just come back to — yes? I wanted to come back to sort of the office discussion. And frame it the following way. And I agree with your sentiments on office or returning to the office. I myself have been back in the office and feel a lot better than living at work. But I want you to compare it to the mall business, which you accurately got out before things got really, really bad and save shareholders from a lot of losses. Why wouldn’t the office space market go like what’s happened to the malls, right? And you go back and everyone said, oh, people want to experience the malls. They want to feel the close before they buy them, but then there was an alternative driven by technology that allowed us not to do that anymore. And so I guess, why are you in the belief that what happened to malls will happen to office?
Steven Roth
That’s a nasty question. There is a school of thought that says that work from home is to office values as Amazon is to retail values. Do you understand what I’m saying?
Michael Bilerman
Yes. No. And that’s why I’m asking. The market is, I don’t — I agree with you on the future of office. But the market is telling us a different thing.
Steven Roth
The answer is that, that’s something that we talk about every day. It’s obviously — it was obviously unthinkable that hundreds of billions of dollars of mall values could be destroyed, but look — but low and behold, it has happened. It’s obviously unthinkable that all the automobile companies could go broke, but along comes Tesla. So we are very respectful of the question that you ask, and we think about it daily.
Michael Bilerman
And the succinct answer as to why you believe that office won’t follow the trend of malls is?
Steven Roth
The answer is that I believe that if you work from your kitchen table, and your kids are crawling at your feet. And you are not with your colleagues. That’s not a great outcome. If you are ambitious and want to get ahead, you can’t get ahead from your kitchen table. You have to be in the office with your colleagues. If you are a manager and you have 20 people in your department that work for you, I think if they’re each at their kitchen table, I mean I don’t know how you manage that. I think if you’re a manager, you want your team in the office where you can interact with them, et cetera.
So I think the human condition is different. The human condition speaks to collegial work in groups in — as they were basically is in offices. Now obviously, that’s going to get nipped around the edges that I can’t tell how much. None of this would have happened, whether or not the technology like Zoom, okay? So technology enabled our business, your business to be able to react to this shutdown by working from home and keeping the railroads running on time. So that’s an amazing thing. But there’s the human condition. So it’s not impossible that there will be a day here and day there. They’re working from home. It’s not impossible that certain groups will work from home. It’s not impossible that things will change. But the core, I still believe the core will be of value. Now let’s get back to what that means. I think that means the better assets and the better locations will thrive.
I think that it means that the commodity lower quality assets in off locations will struggle. So that’s what I think. On the other hand, there is uncertainty in this situation that a management team has to have — has to be aware of and has to be — has to focus on daily.
Nothing about this answer is helpful to shareholders. Roth snaps at the analyst, then doubles down with a strawman argument that everyone working at home is at their kitchen counter with their kids beneath their feet – as if there is nothing in between. He then goes into some touchy feely shit about how office is conducive to the “human condition.” Give me a break.
Look, I’ve been clear in this space that I strongly agree with Roth that it is much more productive for workers to be in a collaborative office environment than working from home. I’ve written about it multiple times in recent months. But, here’s the thing: IT DOESN’T MATTER. What does matter is how companies respond in the new environment going forward. And, what we have seen time and again is that employers will sacrifice difficult-to-quantify productivity at the alter of the quarterly P&L statement. Perhaps the best example of this is the open office trend. Throw on some ESG pressure to reduce employee carbon footprints, and you have a recipe for substantially reduced demand.
Thing is, that Roth obviously knows this which is why a powerful billionaire CEO, was reduced to snapping at an analyst and conjuring up straw man arguments on an earnings call. He had to know that question was coming but still had no way to answer it. I’m picking on Roth here but no one else in the office space has an answer to the question either. The reality is that office is in a bad place right now and those most exposed are forced to tap dance all over the place to avoid the truth – much like mall landlords 15 years ago, they are over-exposed to an asset class that is on the wrong side of a major trend.
What I’m Reading
Give and Take: Retail landlords are offering existing tenants rent reductions in exchange for lease extensions in an effort to stabilize cash flow and keep surviving occupants in business. JLL
A Tale of Two Markets: Demand for apartments in more affordable Sun Belt cities is rising while asking rents in pricey coastal cities are falling. We are headed into a period where the national numbers for apartment rentals, which are dominated by large coastal markets are likely to be quite negative. However, a look at individual markets, shows that the Sun Belt is benefiting at the expense of the coasts. Costar (h/t Tad Springer)
Accelerating Shift: It is probably already obvious but online retailers are going to have a banner holiday season as shoppers shun malls and crowded places. This was inevitably going to happen over time but the pandemic has accelerated it by several years. Bisnow
The Trend Continues: The average U.S. mortgage rate for a 30-year fixed loan fell 3 basis points this week to 2.78%, Freddie Mac said in a report on Thursday, the lowest rate in the survey’s near 50-year history. This week’s rate broke the previous record low on Oct. 22 by 2 basis points. This is happening despite rising bond yields, thanks to spreads compression. Housing Wire
Can’t Stop. Won’t Stop: Relentless fundraising and strong investment performance will more than double the Private Equity industry’s assets under management over the next five years, according to Preqin’s projections. Institutional Investor
Chart of the Day
Commercial real estate prices largely traded in tandem before the Great Recession. Afterwards, they have completely decoupled.
Source: Green Street Advisors
WTF
Take the Edge Off: Google searches for ‘liquor store near me’ hit an all time high during election night as Americans watched the polling results come in. The Daily Mail (h/t Steve Sims)
Test Drive: An Oklahoma man is facing an indecency charge after allegedly trying out a sex toy described as “an Auto Blow device” in an adult novelty store. The Smoking Gun
Basis Points – A candid look at the economy, real estate, and other things sometimes related.
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